Make IT Work

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Please wait for pixLike the
flashing marquee of the bollywood blockbuster, the stars of the PC world have been
undergoing a dramatic but a sure change from the present. Take a look at the lineup today
and one that was there but yesterday. Worthy names such as Sterling, Modi Olivetti, ICIM,
DCM, and finally PCL are rarely seen in the mainstream of PC market and industry. To
dismiss these casualties as the by-products of a post-liberal economy would be too
simplistic. The demise of these and many other Indian brands is the story of how a global
game is played out in one of the world”s largest emerging markets and how, in many a case,
the native players were simply not savvy enough to pit their brains against the more
experienced international boxwallahs.

Of PCL Factor Et Al
If HCL and Sterling initiated the beginning of the volume sales in this country, it was
PCL which converted this skill into a fine art. Things began to change in the country as a
result of some bold initiatives in the area of PC marketing. Sterling Computers through
its marketing campaign sent the message that a PC could be a vital tool for running an
office. The latest addition to these attempts was PCL”s Dhamaka. Today, the legacy of
PCL”s offer is-it has belied the theory that PC is a costly item and that it can never be
within a common man”s budget. What is happening in the PC market now is just what other
electronic consumer goods have experienced worldwide-volume sales with plummeting margins.
The people in the business of selling PCs are learning the hard way that as theorization
of life is an impossible task, so is any prediction about the shape of the PC business to
come.

As PCs became more and more of a consumer
electronic commodity, especially in the SME and SOHO sectors, a silent paradigm shift in
the strategy of selling a PC happened. The recent IMRB report on PC buying patterns
suggests that in descending order-product quality, price, company reputation, and after
sales service are the important parameters in choosing a brand for the corporate sector.
On the other hand, in SME and SOHO sectors, price points and support are significant
variables. Probably few Indian companies like HCL and Zenith realized this change and
evolved their business strategy according to the need of the hour. That is the reason why
so much money was spent on Zenith advertisement copy-MNC quality, Indian prices. While in
some cases the Indian brands have simply been out-marketed by sheer muscle and tactics, in
an odd case or two, the seemingly powerful Indian brand has simply capitulated
anticipating a tough future. “These are cases where the Indian brands have thrown in
the towel without a fight,” says an industry player.

In the last two years, the price of a PC
has taken a nosedive. On an average, each year, there was a reduction of 15 percent but
the growth in numbers more than compensated the drop in unit price. However, there was a
catch. With the MNC brands dominating the stage, many Indian brands were caught in a cleft
of sorts-while the unit price kept dropping, they were losing marketshare to the
foreigners. Hence commenced the decline of the Indian brand. As a result, the share of
some of the national brands shrunk. Notables are PCL, Modi Olivetti, and DCM DS. “It
would be wrong to argue that PCL is out of business because it tried to sell its brand at
wafer-thin margin. Most of the brands are doing it now. PCL failed because they did not
fully work out the entire logistics of selling a cheap PC. They did not manage their
inventories, finance, and quality control. As a result, the company failed to honor the
consumer”s confidence,” says DK Das, Business Development Manager (East), Siemens
Nixdorf.

Market watchers also attribute the fall of
PCL to the fact that it tried to play the game of global brands without the deep pockets.
While PCL can be faulted for its acts of omissions and commissions, the company will still
be remembered for driving the price points of the PC to a level where the vanilla PC
starts from today.

The end of PCL story was the starting point
of the growth of the local assembling sector. The spoil of PCL”s share (20 percent
approx.) was mostly appropriated by the local assemblers. And the Indian brands were hit.
Then came Intel”s strategy of promoting its chips. The formulation led to a win-win
situation for Intel as well as the local assemblers. The whole idea of creating a loyal
band of local assemblers who will only use Intel chips henceforth, gave the local
assemblers a degree of respectability and dependability. This further affected the Indian
national brands in the SOHO and SME sectors. The 20-25 percent price difference between a
national brand and an assembled brand of a standard configuration considerably eroded the
price advantage of the national brand. On the other hand, taking advantage of the
situation, the MNC brands, through their offensive market campaign on quality and support,
increased visibility in the market by the opening up of more channels and introducing
price cuts (e.g. Compaq”s Presario 2110) in the first three quarters of 1997 ensconced in
the driver”s seat. “National brands, which dominated the Indian PC market till 1995,
delivered two value-adds to their customers-reliability and cost-effectiveness. The
definition of reliability underwent a redefinition with the launch of Compaq and other MNC
brands in India. The garage assemblers began to deliver dramatically lower prices than the
Indian brands from 1996 onward. As a result, Indian brands lost both the pillars on which
they had built up their market share,” says Supratik Bhowmik, Marketing Manager,
Compaq.

Of Changing Paradigms
The other reason why the national brands found it difficult to sustain is the continuous
recession in the hardware sector. Due to the stress in the money market, the corporate
buying did not take off in the first half as expected and SOHO”s result was not altogether
dramatic. Hence, PC market grew 19 percent volume-wise but value-wise it was only 4
percent. Obviously in the inelastic market condition only two types of players could
survive. One, whose overhead cost is low, has a thin structure with a narrow client base
but always growing, and the USP is friendliness. And the other, who has a deep pocket to
sustain a period of recession, garner profits through volume sales, and the USP is
quality. Very few Indian brands over the years have attained the power of resilience to be
in the second category. “According to an IMRB report, the preference for purchase of
Indian brands in the current year is 33 percent, which is just a 4 percent growth over the
last year”s share (29 percent) and, I believe, in this situation not many Indian PC firms
can sustain their business. At the end of the recession, we may see the share of the
Indian segment being divided between fewer companies with extensive channel base,”
says Sharad Talwar, GM (Marketing), HCL Infosystems.

“If one looks at figure 2 which is a
perceptual map (of image association of real brands like HCL, Wipro, Compaq, IBM etc.), it
is product quality where MNC brands are strongly perceived. The second attribute is price
which when looked as `Value for Money” attribute on the map is equally strong for both MNC
and Indian brands (note the equal distance from the brand positions). This is the core
platform of an assembled brand which none of these brands can usurp,” says Mohan
Krishnan of IMRB.

The 1996 and 1997 PC Quest User Surveys
gave an indication to the way PC market force was shaping up. Though the sample size was
small, the survey showed that how MNCs are gradually moving toward appropriating a larger
marketshare in both desktop office PCs and home PCs. The change of fortune can be
understood from the fact that in 1996, in both the categories, the Indian national brands
were in the predominant position. The recent IMRB study also confirms this change. What is
the reaction of the Indian PC vendors? Raj Saraf, CEO, Zenith Computers, did not want to
speculate on the possible shake-out but he feels that it is not an abnormal situation
where the assembled brands have a considerable presence in the market. “Consider the
US market, where top 10 brands hold only 43 percent of the market and as far as top
national brands are concerned, I don”t think that the leading Indian vendors are in a
crisis. Obviously, the assembled section has a considerable presence. Cutting across every
section, our machines are sold and we are competing with the MNCs on every front. As far
as my brand is concerned, the marketshare is around 7 percent and this year we are growing
at the market rate,” says Saraf.

The management of HCL (which according to
the IMRB survey, has a good mindshare with nearly one out of five respondents naming it as
the first brand of PC) feels that the company enjoys a strong position in the market and
armed with its two ISO 9002-certified manufacturing facilities it is taking the challenge
of both assembled and MNCs head on in the SOHO, SME, and FTU segments.

Transformation Of The Market
Last two years witnessed a transformation in the operational logistics of the PC market.
The changes that have taken place are primarily in the area of marketing and application.
On the marketing front, channel sales have become the most important vehicle of
distribution of a PC. “In the near future, the centralized buying systems of the
corporate sector will be replaced by decentralized systems. The process has already
started and we are witnessing it at Unicorp. This means channel sales is becoming very
important,” says BK Mitra, Zonal Manager (East), Unicorp Industries. Second, the
direct link with the customers has almost been declining and getting replaced by channel
relationships. Vendors like Compaq and HCL are selling 90 percent of their PCs indirectly.
And here the support becomes crucial. In the FTU category, the SOHO and SME segments,
active-friendly support is a necessary condition for the success of the MNC and national
brands.

“Two years back, our profit margin was 10 percent. And 1996
onward, we found our margin dipping to 5 percent, and now it is between 2-4 percent.
Though the channel support has become crucial, I don”t know how the channels will combine
the two incompatibles-low returns and good support. One of the solutions is that in future
the customer has to pay a certain amount for support,” says Arup Sarkar of Thakral
Computers, a distributor for Compaq. Obviously, the answer lies in volume sales. The
vendor who can sell in large numbers can give good support and, in turn, will be rewarded
by more sales. This means that only the large PC vendors with adequate inventories,
country-wide distribution network, and efficient managerial quality can survive. But for
the local assemblers, it is a different ballgame altogether. On a local scale, it is the
value for money and support that put them in the front of the branded PCs. Since the
overhead cost is negligible compared to those of brands, the price squeeze may not effect
their customer support. And their customer base being small, they don”t have to invest a
substantial amount on spares, warehouse, and support personnel.

Another interesting change taking place is
the PC becoming network-centric with add-on cards. The customer is looking for value
additions at a minimum extra price. Here the branded PCs may derive a substantial
advantage over the local assemblers in the short run. “What we are providing with a
box cannot be provided by a local manufacturer certainly. Take the case of CDs and other
freebies that we give with the box to the customer, and also various legal software
specific to the needs of a customer. I think these steps will ultimately give an edge to
the branded PCs over the assemblers in the local market,” says Santanu Sen Sharma,
Business Entity Manager (East), HCL Infosystems Ltd.

But according to Bhowmik, the biggest
change that is taking place is the increasing acceptance of the PC as an enterprise
applications platform by large corporations. Earlier, when an organization wished to
deploy mission-critical applications, it looked at mainframes or Unix boxes. With the
increasing availability of solutions on Windows NT, these very same organizations are
reaping the benefits of price-performance which servers like Compaq, coupled with Windows
NT, can provide. The long-term implications of this is that the big central computer as we
knew it will soon disappear and will be replaced with clusters of servers.

Who”s In And Who”s Out
The year 1997-98 belongs to local assemblers. They are the market makers. Whatever
derision we can invoke against them, in terms of fly-by-night operation, bundling pirated
software and so on, it is the assemblers who regulated the market through appropriation of
around 50 percent of the marketshare in the JAS quarter. However, this does not mean that
their position is safe. The whole legal assembly sector”s business is facing a serious
threat from the East Asian crisis. With the rupee hovering around Rs 39 per dollar, the
unit price the assemblers will have to pay for the spares will be more than that of the
branded PCs since they do not buy in large numbers. This may result in the erosion of a
substantial price difference vis-a-vis branded category in the short run. The spillover
may also result in turning the legal assemblers into gray operators. In the long run,
coming down of the import duty will give a serious blow to the price advantage. Then the
real test of GIDs (Genuine Intel Dealers) will begin. Only those who can manage the
overhead cost with substantial value-addition and local customer care would survive.
Shake-outs in the assembling market are not new but the coming years might see a rise in
their frequency as there are chances of few GIDs becoming ”local satraps” and going for
arrangements with Microsoft (e.g. Microsoft OEM system builder) to bundle legal software
with the box. “Only those local assemblers will survive in the market who can serve
the local customers meaningfully with value additions like Internet and networking
support,” says Sujoy Das of Calcutta-based RDG Computers, a GID.

“I believe, like other countries, in
India too few national brands will survive alongwith the MNCs. Look at China (Legent and
Great Wall), Japan (NEC), South Korea (Samsung), Holland (Tulip), Italy (Olivetti) or
Germany (Siemens), in all of these countries, the national brands are coexisting with the
MNCs. In India, the brands that will survive (HCL will be one of them) will certainly give
the MNCs a run for their money,” says Talwar. But which market segment the surviving
Indian brands will cater? Perhaps one can speculate on that.

The figure below shows the three categories
of the market segment presently operating in the PC market. At present, the national
brands are available in both the price and brand-sensitive segment. So there is an
overlapping in the brand positioning. “Our prediction is that the surviving Indian
brands, in a few years time, will be exclusively in the price segment. There are two
reasons for this: a value addition in the nature of the product in terms of innovation is
always necessary to be in the brand category. For this, a huge amount has to be spent on
R&D, which for a national company is difficult to mobilize. Second, the MNCs in the
near future will start manufacturing PCs in the country (HP). This will give them a
further advantage in positioning their brands.

"Some MNCs have tried to adopt
localized strategies like introducing low-cost entry-level machines in an effort to tap
the huge FTU market. All of them now have local stocking mechanisms, and there have been
reports of some of them setting up local manufacturing facilities as well," says
Rahul Singh of HCL. MNCs are growing at a pace which no one in the industry, in the recent
past, could speculate. With the easy availability of less than $ 1000 machines in the
international market, the mindblock that MNC machines are costlier is certainly
disappearing. If today, the local assemblers are deciding the fate of the market, the MNCs
will decide the future.

INDRANIL CHAKRABORTY,
in Calcutta.

 

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